Business Estate & Tax Attorneys, P.C.

Fiduciary Litigation

Fiduciary Litigation Under California Law

The fiduciary duty is a serious one. Trust and integrity are key. That's why any fiduciary found to be in breach of their fiduciary duties can be held personally (including financially) responsible for any harm they cause.

When there's any allegation that this trust has been breached, the situation inevitably becomes emotional and fraught with difficulties. Understanding these issues involves knowing the nature of the fiduciary position, why disputes arise, and how existing and future fiduciaries can protect themselves from the serious consequences associated with breaching this relationship.

The fiduciary duty

Put simply, the fiduciary duty is an obligation to act in a person's best interest. The fiduciary is in a position of trust, and so must honor that responsibility. In law, a fiduciary duty arises when:

  • One party is duty-bound to act for the benefit of another party, the beneficiary; and
  • The beneficiary places their confidence in this person and expects them to always. represent their best legal interests

Above all, fiduciaries must always place their duties above their personal interests.

Specific fiduciary duties

The specific duties placed upon a fiduciary can be grouped into three categories.

Asset protection

The fiduciary must always act to protect the beneficiary's assets for however long the relationship endures.

Loyalty

There must be no doubt that a fiduciary is acting for the beneficiary's benefit.

Fairness

Regardless of any personal or professional relationship, a fiduciary must always treat beneficiaries with the utmost respect and fairness.

Breaching the fiduciary duty

It's worth remembering that, in California, allegedly breaching a fiduciary duty is not in itself a criminal offense. It can, however, be tied to criminal activity, such as fraud.

In California, the injured party, in this case, the beneficiary, can sue the fiduciary for both punitive damages and compensatory damages.

Compensatory damages seek to pay the injured party for their losses and suffering at the hands of the fiduciary. Punitive damages, on the other hand, are designed to punish the fiduciary. From a policy standpoint, punitive damages show all existing and future fiduciaries that breach of trust will not be tolerated.  

Where disputes typically arise

When it comes to fiduciary litigation in California, there are a few areas where disputes most commonly arise and become contentious. In all instances, the beneficiary, or the plaintiff, must show four things:

  • A fiduciary relationship exists;
  • The fiduciary duty has been breached;
  • There's proximate cause; and
  • Quantity of damages sued for

Below are examples of circumstances in which BETA typically acts on behalf of fiduciaries facing disputes and litigation.

Beneficiary-trustee disputes

A beneficiary may be unhappy with how a fiduciary or their trustees are managing their trust. In these cases, the beneficiary may worry that the fiduciary is acting carelessly and costing the trust money, or mismanaging the trust in some other way. For example, perhaps the trustees aren't paying appropriate tax, or they're using an inefficient tax structure.

Family disagreements

Unfortunately, when it comes to estate planning, trusts, and wills, disputes within the family are common. These disputes are particularly heated, and it takes skill, patience, and empathy to manage them. Given that the fiduciaries themselves may be family members, the disputes become all the more complicated.

Fiduciary removal

Although it's a last resort, it's possible for the court to remove a fiduciary from their position if they believe they've breached their duties. The beneficiary must convince the court that the fiduciary has breached their duty--the court won't make a finding like this lightly. In this instance, if the fiduciary is removed, it's inevitable that they will be found personally liable to the beneficiary to some degree.

Contested accounting proceedings

A fiduciary may be required to provide a beneficiary with an account under the Probate Code. If the beneficiary does not believe that the account is complete or accurate, the beneficiary can raise a claim in probate court to challenge the account. The beneficiary can also contest the account if there's an unreasonable delay in producing them.

Wills

Although people leave wills to offer some certainty in how their affairs should be handled, wills often end up contested and subject to lengthy arguments. If there's any suspicion that the fiduciary unduly influenced the decedent to put them in this position of trust, family members or business associates may challenge the validity of the will.  

Reformation proceedings

In some cases, a fiduciary, or trustees in a trust, may request that a trust is reformed. This can happen when, for example, the person who created the trust changes their mind about something. A common example is if a parent wants to delay their children receiving their trust fund until they're older. In these cases, the children, the beneficiaries, may sue the fiduciary if they don't think the action serves their best interests.Creditors' claims Creditors will make claims on a decedent's estate, and these debts must be paid before the remaining estate can be distributed. Disputes are possible when there are insufficient funds to cover creditor claims, or if the fiduciary acts in such a way that they prejudice these claims.

Asset acquisition

The fiduciary is responsible for distributing a decedent's assets according to a trust, will, or the laws of intestacy. Disputes can arise when a beneficiary disagrees with the decisions the fiduciary takes; for example, if he or she accumulates undue costs or takes an unduly long time distributing the assets.

Any mishandling of assets can leave a fiduciary personally liable for the mistakes.

Avoiding fiduciary litigation in California

Although it's impossible to avoid every possible dispute between a fiduciary and a beneficiary, there are ways in which you can minimize your exposure to potential litigation.

Think carefully before accepting the position

Never take on fiduciary duties until you're sure the responsibility is right for you. Ensure that your interests do not conflict with the beneficiary's, and be clear about any concerns you have from the outset. Becoming a fiduciary, and exposing yourself to potential personal liability, is not a decision to take lightly.

Limit liability

If you're a fiduciary, you'll want to limit what you're personally responsible for. That's where the legal instrument, or the contract between the parties, comes in. The clauses, for example, should make clear what discretionary powers the fiduciary has, and when fiduciary liability is limited.

Always act in a beneficiary's best interests

Avoiding fiduciary litigation often comes down to clearly and effectively communicating the decisions you take as a fiduciary, and showing how you can justify them as being in the beneficiary's best interests. A failure to act in the beneficiary's best interests may inevitably lead to litigation and exposure to costly personal liability.

Conclusion

Disputes between beneficiaries and fiduciaries are sadly all too common. If you have fiduciary duties or you're considering becoming a fiduciary, it's always a good idea to seek legal advice first. Having a clear understanding of your duties, and taking all possible steps to limit your fiduciary liability, are the best ways to avoid becoming personally liable for any alleged breach of fiduciary duties.